Citigroup to Increase Common Stock, Government to Reduce Spending - Are They Serious?

Somebody will have to explain to me why everything house-related always has costs in the multiples of thousands. It is never "$600" or "$1450" for anything, it is always "$1000" or "$2000". Does anyone have a chart that shows how many ex Goldman Sachs (GS) employees work in the construction/home improvement management area? Thanks in advance.

Stock Positions
Well it took an entire day, but true to form, whenever I open positions things go the other way. A little bit of a down day for gold, silver, and the S&P but nothing too crazy. My gold and silver buys have the power of my macro convictions behind them, and so those I will ride out a bit if they have trouble. Articles like this one always make me want to take out precious metal bars and polish them up:

Chinese Begin Buying Up Gold

Individual Chinese investors are now rushing to hoard the precious yellow metal, hoping it will retain value if the dollar collapses.
"The declining value of the dollar along with the worsening economic outlook is forcing investors to seek other anti-inflationary investment tools, like gold," Ping An securities analyst Xiao Zheng told The China Daily.
China is the world's second-largest gold consuming country. In late April, the People's Bank of China announced its gold reserves had risen 454 tons since 2003 to 1,054 tons, a signal that the central bank is taking gold as a reliable hedge against financial uncertainties as fears over the global recession deepen.
Analysts say they expect the Chinese government would continue to raise its gold holdings as the yuan becomes increasingly internationalized.
Chinese demand for gold bullion reached 68.9 tons in 2008, up 176 percent from 25 tons in 2007.
The World Gold Council's Gold Demand Trends report for the first quarter shows gold demand in China jumped to 114 tons in the first quarter.
"If I look at 10 years from now, I do believe that the purchasing power of the dollar is going to be substantially less,” portfolio manager Axel Merk told The U.K. Guardian.
“Gold is ... the simplest way to play the devaluation of the dollar and potential inflation," Merk said.

Seeing that the dollar has lost 93% of its purchasing power this century, I am going to guess that the drop after 10 years that Axel Merk (formerly of Guns N Roses) predicts will come true. Seeing that China is slow to dump US debt, I imagine they will be slow to dump gold as well.

My S&P position (via SPY) is simply a trade for the levels I had outlined previously. Any trouble with that position and I will drop it like a bad habit. Well, actually, I have a hard time dropping bad habits, but let's just say I will jettison the stock fast.

Bad at Math
I have to admit that even though I am a scientist, I am terrible at math. I can calculate tips in my head, estimate what the groceries will add up to, and do simple percentages in my head, but anything else I need help with. Wall Street math is sort of like Calculus or Differential Equations to me; I know it exists but I have no idea how they work.

Case in point: Citigroup (C) announced Thursday that they intend to INCREASE their common stock outstanding from 15 Billion to 60 Biilion. You read that right. This amounts to a 100% dilution for shareholders. Yet the stock was only down 3%. Zero Hedge has some more observations:

Citigroup filed a proxy today in which it disclosed it was seeking to increase its authorized common shares outstanding from 15 billion to 60 billion. While the preferred to common conversion was expected to increase the total common from 5.4 billion to 22.8 billion, the 60 billion number, which obviously was not picked out of a hat, implies that the bank will likely proceed with its creeping equitization plan and potentially dilute the Citi common stock by more than another incremental 100%.
In the meantime, the Common-Pref arb holders are sweating their gonads off day after day, as the exchange which was supposed to close months ago, is still off somewhere in the nebulous and stagflationary future. Of course, when you are paying 100% annual repo rates for those 7.3 shares of common short, every single day bites more and more of your "guaranteed" IRR off. Bloomberg had this to say on the persistent mirage that is the closing date:

Citigroup Chief Financial Officer Edward “Ned” Kelly said on a May 7 conference call with analysts that the SEC must sign off on the exchange documents before the offer can proceed. The bank separately needs to complete an agreement with the U.S.
Treasury Department to convert as much as $25 billion of government-held preferreds into a 34 percent common stake.
Once the exchange offer is formally extended, the bank will keep it open at least 20 business days before closing, according to the filing.
“We plan to launch this as quickly as we can,” Kelly said on the May 7 call.
In a note to investors yesterday, Sanford C. Bernstein & Co. analyst John McDonald wrote that “questions remain about both the timing and amount” of the pending offer.
“While it is difficult to gain any clarity on this issue, we sense that Citi will likely complete its preferred-to-common exchange in early- to mid-third quarter,” he wrote.

Looks like Ned and the SEC are fully set on precipitating total and complete IRR shrinkage, and wrecking whichever funds are still left in the trade. Once that is done, the subsequent 100%+ dilution once the CRE volcano finally explodes, will make any remaining longs very unhappy

Yeah, what he said.

Seriously, while everyone is heralding the new golden era of banking, Citi is preparing to make a major distribution move using the wild atmosphere of the current rally as a smoke screen. This one bears watching.

"You Cannot Be Serious!"

"You Cannot Be Serious!!" - Tennis star John McEnroe responding to a line call at Wimbledon

I had thought that whatever Ben "Boom Boom" Bernanke said Thursday in his remarks to the House Budget Committee would probably move the markets. While the reaction was more muted than usual, I think that may be because everyone was too busy laughing to take any action.

From the department of "You Can't Make This Stuff Up" (YCMTSU) Bernanke Thursday called for the US Government to take steps to reign in the gigantic budget deficit or risk problems with funding. Really he did. You can double check me here. An excerpt:

Addressing the country's fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well controlled.

Funny stuff.

We are blessed to have seen the rare and mysterious "coordinated message effort" that has been rumored to exist in the government, but has never been caught on film...until now. Consider:
-Tim Geithner in China assuring them their US debt holdings are safe (giggles erupt)
-Kansas Fed head Thomas Hoenig actually made the statement that Fed rates would have to be RAISED; and sooner rather than later:

The markets won't be fooled by artificially low rates for long. Market participants realize that a period of high deficits and accommodative monetary policy are an invitation to increased inflationary pressure. I suspect we are experiencing the first signs of the markets' concerns in the rising rates and increased volatility in longer-term Treasury markets. I suggest strongly that we need to be alert to the markets' message and begin in earnest to bring monetary policy into better balance before inflation forces our hand.

At this point I have a stomach ache from laughing so hard.

The Fed is concerned about budget deficits, but they do everything in their power (and some things over that line) to enable this kind of spending. What's more they promote (using Keynesian Clown economics), this same kind of runaway spending by both the people (via their own finances) and the government.

This new message of "responsibility" can only be aimed at placating nervous debt holders, hence the trip to China and this hilarious hint at raising rates.

I have a bet for Thomas Hoenig: 10% of my net worth versus 10% of your net worth that the FED rate is at 0% come January 1, 2010.

There is NO WAY rates are going up anytime soon, at least as set by the Fed. Housing is barely breathing with mortgages at 4-5%. What happens if they climb to 6%? 7%? Higher? You guessed it, SPLAT!

I could go on about all the garbage the Fed now holds (MBS, CMBS, other toxic assets) that they exchanged treasuries for and how that will make extrication from the markets, becoming independent again, impossible, but this is all old news.

I mean, what could happen if the US does not get a grip on their out of control capital needs? Nothing too serious:

Latvia Fails in Treasury Bill Auction, Gets No Bids
June 3 (Bloomberg) -- Latvia failed to sell about 50 million lati ($99.9 million) in Treasury bills at auction today, receiving no bids, according to a statement on the Riga Stock Exchange.
The absence of bids comes after a liquidity shortage for lati helped drive up the overnight lending rate to a record 16.4 percent, asking prices show. The central bank has bought about 1.3 billion lati since the beginning of 2008, removing them from circulation and creating a market shortage of the currency.
“There is no free money in the market currently,” said Andris Larins, an analyst at Nordea Bank AB. “I don’t think it’s a surprise in the current conditions, the banks need the money themselves. The Treasury has sold more bills than usual lately and the “market is stressed” due to pending elections and recent statements for and against a currency devaluation.

I am not saying that the US is Latvia. Well, I am saying that, but luckily for us nobody else can say that, at least not in the open. The differences are in scale, not principle. Good thing perception IS reality otherwise I might be nervous.

Comments

[lbsterling]

You'd lose 10 percent of your net worth on that bet, because Hoenig is right: rates are going to have to rise or else there will be no buyers for U.S. treasuries.

So yes, they will raise, and yes, "Splat" for housing and the markets.

The only other option is the Fed as sole buyer for treasuries, and that would mean mega-inflation and dollar collapse.

More likely is that they'll try to walk the line: slight rate increases AND heavier Fed buying of treasuries etc, leading to some inflation (who knows how much) AND more recession (who knows how much).

Stagflation is the best case scenario.

It's a wing and a prayer right now and the Fed has no good options.

2009 Jun 05 03:46 AM

[dcb]

wrong, let housing correct to where it belongs. nationalize insolvent banks, problem fixed, bail out the american voter not the wall street banker. problem solved. the fed has no good choices because the wrong choices were made from the start. Now they are stuck, can't admit they were wrong and can't stop a policy.

It is in a sense a vietnam of our own making. stuck and can't get out with higher casualties each and every day while the government keeps telling you things are fine.

the right policy is to stop the war and get the hell out, but we won't and therefore we have already lost. in fact the right policy was never to get involved in the war in the first place.


On Jun 05 03:46 AM lbsterling wrote:

> You'd lose 10 percent of your net worth on that bet, because Hoenig
> is right: rates are going to have to rise or else there will be no
> buyers for U.S. treasuries.
>
> So yes, they will raise, and yes, "Splat" for housing and the markets.
>
>
> The only other option is the Fed as sole buyer for treasuries, and
> that would mean mega-inflation and dollar collapse.
>
> More likely is that they'll try to walk the line: slight rate increases
> AND heavier Fed buying of treasuries etc, leading to some inflation
> (who knows how much) AND more recession (who knows how much).
>
> Stagflation is the best case scenario.
>
> It's a wing and a prayer right now and the Fed has no good options.

2009 Jun 05 05:30 AM

[dcb]

It isn't splat for the housing markets. it is splat for the banks. banks depend on the cash flows from inflated house prices in order to fake the market for mortgage backed securities and pretend they are worth something.

Higher rates just mean lower house prices. when the right price is reached they will sell. This of course means the fantasy that our banks are solvent will be exposed even more.

many of the problems we will experience are about propping up an inflated asset (housing. it is about bailing out the banks, not fixing the economy.

2009 Jun 05 05:35 AM

[Glen L.]

First, great article, sarcastic and funny, thanks ED.

I basically agree with dcb, but the solution is to end the Fed and get the government out of all markets. Let's see how long the crooked bankster cartel can operate on a level playing field, without their protection. Nationalization of failed banks is no answer, either, let the healthy private sector banks cannibalize them.

2009 Jun 05 12:14 PM

[Northstar10000]

Great idea to starve the beast by saving but how about also wounding it at the same time by having everyone apply for some form of Government assistance. HOw about all those programs out there.
I'm going for the food stamp option myself. You could buy a house or car and get government money. If you lost your job i'll bet there are more than just unemployment benefits. If the government is offering the stuff they must want us to take it.

2009 Jun 06 09:53 AM